Chapter 1: Introduction to the Payroll Process
CHAPTER 1: INTRODUCTION TO THE PAYROLL PROCESS Objectives The objectives are •
Describe the basic concepts, terms, data, and processes that are used by a payroll department, from the perspective of a payroll system's end product.
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Describe how payroll tasks are divided into the three Microsoft Dynamics® AX 2009 functional payroll categories, and how these categories help organize Payroll module features and procedures.
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Describe the typical clients and users of the Payroll module and the kinds of payroll systems they may be converting from.
Introduction To learn how to implement, set up, and manage a payroll system, you first have to learn what that system produces: accurate and timely pay for each employee. From this perspective, you can see the results of any payroll system in the employee pay statements. This course uses a typical pay statement to show the basic concepts, terms, data, and processes that are used by a payroll department. Because the clients you will be working with may be new to Microsoft Dynamics AX 2009 Payroll, you must to be familiar with the kinds of systems they may be using currently to meet their objectives. You must also consider the clients with whom you will be working: the three categories of Payroll system users. Learning about Payroll system users and their objectives helps you prepare for Course 2, "Introduction to the Microsoft Dynamics AX 2009 Payroll module".
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Microsoft Dynamics速 AX Payroll
Pay Statements Every payroll department and payroll system must produce accurate and timely pay for each employee. Employees earn payment for work that is performed during a defined calendar period, which is know as a pay period. To make sure the payments are accurate, the system must know all the earnings and deductions applicable to every employee during any pay period, and must be able to make all the associated calculations. Any payroll system must be able to transfer funds for payment to employees, unions, government agencies, retirement funds, and so on. It must then be able to follow up by reporting the details of what it has done. One kind of reporting provided by all payroll systems is the pay statement, or pay advice. This provides individual pay information to every employee for every pay period. It tells employees what they have earned and what was deducted during the current pay period. It also shows how the final pay was calculated and lists the year-to-date totals for those earnings and deductions. In the Payroll module, pay statements are always printed when employees are paid by check. It is also common for companies to issue pay statements when paying employees by direct deposit. To facilitate data storage and multiple printing requirements, we recommend that companies print pay statements to file.
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Chapter 1: Introduction to the Payroll Process The following example of a pay statement summarizes the basic concepts, terms, data, and processes that a typical payroll department uses.
FIGURE 1.1 TYPICAL EMPLOYEE PAY STATEMENT
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Microsoft Dynamics® AX Payroll Layout and Definitions The check at the bottom of the pay statement in Figure 1 indicates that the company pays this employee by check. The pay statement in figure 1 is divided into six areas. Area
Description
Payment
The net pay that an employee will receive for the pay period. The basic calculation is shown: Net Pay = Gross Pay - Deductions Total Payment = Net Pay + Advances
Earnings
The amount that an employee has earned during the pay period. It is either: • a salary amount •
an hourly rate multiplied by a number of hours worked
•
a piece rate multiplied by pieces of completed work
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a flat amount (known as a Generated Earning in AX 2009 Payroll)
The amounts are itemized, and a Total Earnings sum is displayed. Benefits
Benefits to the employee are services paid by the employer, whereas deductions are charges or services paid by the employee. In some cases, both employee and employer will contribute to the same benefit/deduction. Examples of benefits include the following: • Insurance plans (for example, dental, health, or life insurance) •
Company contributions to pension funds
•
Company contributions to charges for parking or use of a company gym
The amounts are itemized, and a Total Benefits sum is displayed.
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Chapter 1: Introduction to the Payroll Process
Area
Description
Deductions
A summary of all deductions from an employee's earnings. Deductions are calculated each pay period during the payment process, and are recorded for reporting and remittance purposes. Examples of deductions include the following: • National and regional income taxes •
Union or professional dues
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Court-ordered deductions (garnishees, child support)
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Advance recovery deductions (used after an employee has received a pay advance)
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Negative net deductions (used when an employee has more deductions than earnings on a payment, and an advance is created to bring net pay to zero)
The amounts are itemized, and a Total Deductions sum is displayed. Bank Description
Banks reflect the current status of an employee's entitlements. Entitlements are employee time and monetary rights associated with employment that employees can accumulate and deplete. Examples include the following: • Vacation •
Banked overtime
•
Sick leave
Entitlement banks are examples of “accumulated” data, a type of data that is accumulated or decremented over periods of time. Event Description
Notification to employees about important employmentrelated events, such as performance reviews, job changes, and so on.
Pay Periods, Cycles, and & Groups Because employees receive a pay statement for each pay period (which could be weekly, monthly, bi-weekly, etc), their employer's payroll department adopts a process, or pay cycle, to prepare and verify each employee's pay data for each pay period. Some companies use different pay periods for different kinds of employees - and this means that they must manage a separate pay cycle for each pay period. For each pay cycle, payroll departments must collect data, calculate earnings, produce payments, oversee all applicable taxes, and perform required reporting tasks.
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Microsoft Dynamics® AX Payroll Payroll departments can simplify and reduce their pay cycle workload by grouping together employees whose pay data is largely the same. For example, a company may create such Pay Groups for employees who share one or more of the following: •
Pay cycle
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Pay dates
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Currency of payment
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Security requirements for pay-related information
Payroll Data Most payroll departments use similar payroll processes that they customize to their particular requirements. The process is performed for each pay cycle, and uses several kinds of data. Figure 1 shows how the data seen in a pay statement can be grouped into these general kinds of data. Type of Data
Description and Examples
Employee Data
Data that a company tracks for each employee. Examples include the following: • Salaries
Pay Period Data
Calculated Payment Data
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Wage and Piece Rates
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Employee Benefits
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Employee Deductions
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Employee Personal Data
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Employee Position Data
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Employee Bank Account Data
Data that is specific to a pay period. Examples include the following: • Shifts, Hours Worked •
Overtime
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Unscheduled Benefits and Deductions
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Piece Work Records
Data that a company must calculate during each pay period for each employee. Examples include the following: • Earnings (Salaried, Hourly, or Piecework) •
Premiums
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Additional Earnings
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Payment (Gross to Net)
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Chapter 1: Introduction to the Payroll Process
Type of Data
Description and Examples
Accumulated Data
Any data that the company, government, or employee requires a company to accumulate for payroll or taxation purposes. Accumulated data is usually a running total that reflects an increase or decrease over time. Examples include the following: • Gross pay •
Tax deductions
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Vacation hours or days
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Banked overtime
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Sick leave hours or days
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Garnishments
In the Payroll module, the devices used to keep track of how data accumulates or decrements over time are called accumulators. Accumulators are used for many purposes, and store data for later reference, reporting, or calculation purposes. More information on accumulators is available in courses 3 and 7. Distribution and Reporting Data
Any data that a company uses for distribution of payments and payroll reporting. Examples include the following: • Check identification and accounting information •
Direct deposit information
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Employment-related information (such as the Events in Figure 1)
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Tax reports made to governments
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Information that is provided to unions
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Internal company reports
Standard Payroll Process All companies require flawless payroll management. Because no company can tolerate the legal, financial, and human resources consequences of bad payroll management, payroll professionals must strive to ensure: •
Accuracy
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Compliance (with government, union, and corporate regulations and guidelines)
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Microsoft Dynamics® AX Payroll •
Confidentiality
•
Timeliness
With such common goals, almost all payroll organizations follow a variation of the same basic payroll process. At the highest level, this process works through a series of predictable stages.
FIGURE 1.2 TYPICAL HIGH-LEVEL PAYROLL PROCESS
The following table provides some examples of activities that a company might associate with each of these stages: Stage Preparing Data
Calculating Payments
Approving Payment
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Associated Activities • Adding or removing employees as required •
Making required changes to data associated with employees (wages, rates, benefits, deductions, contact information, bonuses, and so on)
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Collecting time data
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Verifying time data
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Calculating base wages (salary, rate and hours worked, or rate and work completed, plus bonuses, overtime, and so on)
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Calculating benefits and deductions (before taxes)
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Calculating taxes
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Calculating after-tax deductions
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Calculating net payment
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Ensuring sufficient approval system is set up
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Ensuring payments are approved
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Chapter 1: Introduction to the Payroll Process
Stage Distributing Payments Recording and Reporting
Associated Activities • Distributing payments (print, send, document) •
Depositing collected deductions
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Corporate reports
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Government reports
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Reports to employees
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Reports to other parties (health plans, pension plans, and so on)
You can separate these stages into several detailed steps. To provide the functionality to achieve these steps, Microsoft Dynamics AX Payroll groups them into functional categories.
AX 2009 Payroll Functional Categories Microsoft Dynamics AX 2009 Payroll groups the detailed steps in each stage of the general payroll process into three functional categories: •
Data Preparation
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Payroll Processing
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Pay period Reporting and Record Keeping
These functional categories form the basis for how Microsoft Dynamics AX 2009 Payroll organizes its features and functionality, and how clients will use the Payroll module to organize and complete their pay cycle tasks.
Data Preparation Data preparation involves to add, modify, or delete various kinds of data, such as addresses, payment methods, wages, salaries, time worked, and deductions. Examples in Microsoft Dynamics AX 2009 Payroll include the following: •
Adding or removing employees as required
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Making required changes to data associated with employees (wages, rates, benefits, deductions, contact information, bonuses, and so on)
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Collecting time-related data
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Verifying time-related data
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Calculating base wages (salary, rate and hours worked, or rate and work completed, plus bonuses, overtime, and so on)
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Calculating benefits and deductions, taxes, after-tax deductions, and net payment
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Microsoft Dynamics® AX Payroll Payroll Processing Payroll processing involves using the prepared data to: •
Make payment calculations
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Approve payments
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Distribute payments
Clients will use Payroll module features and procedures to achieve payroll processing tasks. The following table provides some typical examples. Payroll Processing Goal
Example Procedures
Payment Calculation
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Calculate basic earnings (salary, rate and hours worked, rate and work completed, plus bonuses, overtime, and so on)
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Calculate benefits and deductions, taxes, after-tax deductions, and net payment
Payment Approval
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Make sure sufficient approval system is set up
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Make sure payments are approved
Payment Distribution
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Distribute payments (print, send, document)
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Distribute (remit) collected deductions
Pay Reporting and Record Keeping Clients will use Payroll module pay period reporting features to help ensure accuracy and visibility. Specifically, they will use Microsoft Dynamics AX 2009 Payroll to:
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Record payments
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Record taxes that they deduct and remit to governments
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Track employee benefits
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Make all the necessary corporate, government, and employee-related reports
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Chapter 1: Introduction to the Payroll Process
Clients and Users To this point, this course has referred to the Payroll module users in a very generic way, by using terms such as the following: •
Payroll department
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Payroll module users
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Payroll administrators
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Payroll professionals
It is important now to be specific about the kinds of users who will be involved in Payroll setup, implementation, and steady-state use.
Microsoft Dynamics AX 2009 Payroll Users From an implementer's viewpoint, there are three general kinds of users for Microsoft Dynamics AX 2009 Payroll: •
Payroll Administrators
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Super Users
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Implementers
The following table summarizes the roles, responsibilities, and recommended qualifications and experience for each user type. User Type
Roles and Duties
Implementer
The implementation team leader, the overall implementation project manager, and trainer. Duties include the following: • Acting as team leader for the site implementation team •
Creating, managing, and documenting implementation project
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Communicating with the client
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Training Super Users as required and defined in the contract
Desired Experience and Qualifications • Microsoft Certified Business Management Solutions Professional Applications for Microsoft Dynamics AX 2009 •
Microsoft Certified Business Management Solutions Specialist Microsoft Dynamics AX 2009 Payroll
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Experienced in using Microsoft Dynamics AX 2009 Payroll implementation methodologies
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Experienced in training new software users.
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Microsoft Dynamics® AX Payroll
User Type
Roles and Duties
Payroll Administrator
The user who does payroll processing for each pay period, and also is responsible for: • Administering employee data •
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Desired Experience and Qualifications • Payroll professional certification •
Experienced with existing payroll process
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Administering time records input into the system and the time approval process
Competent level of computer skills
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Administering earnings generation within the system
Available for Payroll User Administrator Training
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Available for implementation team member duties
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Administering the payment generation, approval, and distribution processes
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Producing reports and make inquiries
Legacy Payroll Solutions Payroll staff generally perform the standard payroll process by using one of three kinds of variations: •
Manual Payroll Processing
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Outsourced Payroll Processing
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Automated Payroll Processing
The Manual Payroll Solution The manual process is increasingly rare, even with small companies. To be able to highlight the advantages of Microsoft Dynamics AX 2009 Payroll (an automated system), you must know the major disadvantages of a non-automated system:
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Additional Labor - requires that employees enter time cards by hand or punch a clock; that payroll staff manually adds and verifies hours worked; that payroll staff manually calculates wages and taxes; and that payroll staff manually creates pay checks.
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Increased Probability of Error - manual calculation and check creation are far more prone to error than automatic methods. This increased chance of error requires more time and labor for error checking and correction.
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Large Time Commitments - requires additional time for the additional labor involved and for error checking.
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Chapter 1: Introduction to the Payroll Process The Outsourced Automated Payroll Solution New Microsoft Dynamics AX 2009 Payroll clients may be transferring from an out-sourced system. Some companies - especially smaller companies that may not have internal access to payroll expertise - may decide to hire an outside provider to perform payroll functions. The payroll service provider manages processing payroll transactions, printing reports and pay checks, making tax deposits, and making tax reports. Although this option is expensive, the attraction to the client is that their involvement is limited - especially in taxation and government-required reports. The client's involvement is limited to: •
Maintaining employee information
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Providing hours for payroll calculation
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Providing payroll changes
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Providing any "manual" paycheck data
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Participating in the validation process
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Distributing the paychecks
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Recording payroll information in appropriate ledgers
The In-house Automated Payroll Solution In-house computerized payroll processes offer significant efficiency and capability advantages over manual methods, and generally are less expensive than outsourcing. They range from less comprehensive systems at minimal cost, to the more expensive and more comprehensive systems that larger companies favor. However, they do require companies to have sufficient payroll expertise to monitor, supervise, and perform the payroll functions. Fully automated systems can include both time entry automation and the capability to have employees edit their own personal information and deduction changes. These advantages make in-house computerized payroll solutions very popular, and explain why there are many payroll software solutions available in the market. Microsoft Dynamics AX 2009 Payroll module is a comprehensive solution that has several key capabilities that take advantage of the intrinsic advantages of inhouse systems. In particular, Microsoft Dynamics AX 2009 Payroll is completely table-driven, rules-based, and effective-dated - this means that it is completely adaptable in the face of changing client circumstances. Also, this flexibility exists at the user level, without the need for programming changes, and is itself leveraged by integration with other AX modules.
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Microsoft Dynamics® AX Payroll
Summary A payroll system must produce accurate and timely pay for the work each employee performs during a defined calendar period, which is known as a pay period. You can see the kinds of data the system uses, and the basic process it uses, in one of the system's primary end-products: the pay statement. A company may have many different pay periods for different groups of employees. Each pay period has an associated pay cycle, during which the payroll system must provide a reason for each employee's earnings, deductions, and pay calculations. The system must be able to transfer funds for payment to employees, unions, government agencies, retirement funds, and so on. It must also make sure that all the necessary reporting is completed. Most payroll systems use some variation of the same basic process. Microsoft Dynamics AX 2009 Payroll divides the process and its tasks into three functional categories. These functional categories form the basis for how Microsoft Dynamics AX 2009 Payroll organizes its features and functionality: •
Data Preparation
•
Payroll Processing
•
Pay period Reporting and Record Keeping
From an implementer's point of view, three general kinds of users use this functionality: •
Payroll Administrator
•
Super User
•
Implementer
During the implementation process, these users cooperate to transfer a payroll department from a legacy system to Microsoft Dynamics AX 2009 Payroll. The legacy system generally is one of three kinds of variations: •
Manual Payroll Processing
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Outsourced Payroll Processing
•
Automated Payroll Processing
The next section of this training collection will introduce the Microsoft Dynamics AX 2009 Payroll module and its user interface.
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Chapter 1: Introduction to the Payroll Process
Test Your Knowledge 1. Describe what a benefit is, what a deduction is, and the difference between the two.
2. List three possible reasons why you might group employees into separate pay groups.
3. What type of data is included in an employee's salary? ( ) Employee Data ( ) Pay Period Data ( ) Calculation Data ( ) Taxation Data. 4. What type of data is included in a net payment? ( ) Accumulated Payment Data ( ) Earnings Data ( ) Calculated Payment Data ( ) Reporting Data
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Microsoft Dynamics速 AX Payroll 5. List the three functional areas that Microsoft Dynamics AX 2009 Payroll divides payroll process and tasks into.
6. List the three kinds of users involved in Payroll implementation.
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Chapter 1: Introduction to the Payroll Process
Quick Interaction: Lessons Learned Take a moment and write down three key points you have learned from this chapter 1.
2.
3.
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Microsoft Dynamics® AX Payroll
Solutions Test Your Knowledge 1. Describe what a benefit is, what a deduction is, and the difference between the two. MODEL ANSWER: A benefit is a charge or service paid for by the employer, and is considered a employment benefit to the employee. A deduction is considered any subtraction of funds from an employee's earnings. In some cases, both employee and employer will contribute to the same benefit/deduction. 2. List three possible reasons why you might group employees into separate pay groups. MODEL ANSWER: To simplify payroll processing, you may want to group employees who share the same pay period, are paid in the same currency, or who have the same security requirements for pay information. 3. What type of data is included in an employee's salary? (•) Employee Data ( ) Pay Period Data ( ) Calculation Data ( ) Taxation Data. 4. What type of data is included in a net payment? ( ) Accumulated Payment Data ( ) Earnings Data (•) Calculated Payment Data ( ) Reporting Data 5. List the three functional areas that Microsoft Dynamics AX 2009 Payroll divides payroll process and tasks into. MODEL ANSWER: Data Preparation Payroll Processing Pay Reporting and Record Keeping 6. List the three kinds of users involved in Payroll implementation. MODEL ANSWER: Payroll Implementer Super User Payroll Administrator
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